ULI Snapshot: Phoenix, Arizona

The HEAT is on in Phoenix, says Steve Betts, the recently retired president and CEO of SunCor Development Company.

“I refer to the current Phoenix economic recovery as HEAT—Health care, Energy [solar/renewable], Aerospace/defense, and Technology [computer/biotech],” explains Betts, chair of ULI Arizona. “Phoenix has been growing all four sectors, but I believe that they will really take off in this next market cycle due to our favorable tax and regulatory structures and the fact that Arizona is now a ‘value proposition’—inexpensive buildings and land, reduced construction costs, available labor, lower cost of living, and affordable homes for employees.”

Betts notes that in February, chipmaker Intel announced a $5 billion fabrication plant expansion, with thousands of new jobs at an average salary exceeding $100,000. “The announcement came shortly after the state passed a sweeping, multifaceted jobs/competitiveness package that includes corporate tax cuts, R&D credits, job-training funds, incentives, and a new commerce authority,” he says. “This balanced package, combined with the expected solution to our structural state budget problems, puts us in a great position to attract companies from California and elsewhere.”

Thanks to the employment and economic revival, Betts says, the so-called redline drawn around the Phoenix market by investors seems to have been erased. “We’ve seen a notable influx of capital, especially into multifamily projects, and quality office and industrial properties,” he continues. “We’ve also seen a large increase in lease absorption in quality, well-located office and industrial properties.”

Donald Keuth, president of Phoenix Community Alliance—an organization that has launched public/private partnerships to catalyze high-quality new development in the heart of Phoenix—agrees that there is a growing sense that the real estate market is coming back in certain sectors.

“The people I’m in contact with mention that the level of activity is on the rise,” says Keuth. “Obviously, there are still financing issues, but the attitude is certainly better. In the downtown area, a Westin hotel just opened and a new Kimpton hotel is under construction with a 2012 completion. The downtown office vacancy rate continues to be the lowest in the metro area; there is only one Class A building that has any large contiguous space available.”

Keuth adds that there is a growing need for more infill development in response to increasing energy costs and the availability of infill sites with full infrastructure. “Creating new housing around our light-rail system is gaining momentum while ridership continues to rise,” he notes.

Even so, Elliott D. Pollack, chief executive officer of Elliott D. Pollack and Company of Scottsdale, an economic and real estate consulting firm, cautions that there are still potholes in Phoenix’s road to recovery. He notes that over the last 12 months, some 7,500 jobs have been created. “While this is a big improvement from the 12 months before, when 100,000 jobs were lost, it shows that greater Phoenix is barely recovering,” he explains. “While the long run is probably very bright, in the near term low rates of growth in migration and jobs suggest that demand for office, retail, and industrial will be modest.”

There will be virtually no spec construction of office space in 2011 or 2012 and absorption will be relatively modest, Pollack adds. “Thus, vacancy rates, which ended the year above 26 percent, will come down to below 25 percent by the fourth quarter of 2011 and slightly below 23 percent by the fourth quarter of 2012,” he says.

Multifamily permits are expected to number 1,500 in 2011. “Vacancy rates for apartments are expected to decline from just over 11 percent at the end of 2010 to 9.6 percent by the end of 2011 and 8.4 percent by the end of 2012,” he points out.

Emphasizes Pollack: “We are clearly on the road to recovery. While high vacancy rates are declining, it appears that the road will be a long and bumpy one.”

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